Homeowners insurance deductibles are an important part of any home insurance policy, as they affect the cost of your policy, as well as how much you and your insurance company pay when you file a claim. Typically, the higher your homeowners insurance deductible, the lower your premium will be.

However, that means lower payouts from your insurer when bad things happen. So it's important to recognize the trade-off you're making and settle on a homeowners insurance deductible that makes sense for you and your finances.

What is a homeowners insurance deductible?

A homeowners insurance deductible is simply the amount a homeowner must pay toward a claim before the insurer steps in to pay its part.

Suppose you have a $500 deductible written into your policy. If your property suffers minor damage that costs $490 to fix, your insurer's going to pay nothing because your claim is below your deductible. In this case, you shouldn't even file a claim.

If the damage to your home is much worse, and the bill comes in at $12,000, you have to pay $500 and your insurer pays for the remaining $11,500.

The same home insurance deductible amount (sometimes referred to as an “all-peril” deductible) applies to most property claims you make with your home insurance company, whether it’s for theft, fire, or frozen pipes that burst. Other types of home insurance claims, such as ones against your liability coverage or guest medical, rarely come with deductibles attached.

When it comes to home insurance there are three main types of deductible:

1. A dollar amount – Your deductible is a chosen dollar sum that you must pay out before your insurer steps in to pay its portion. For example, you have a small kitchen fire and the damages are $3,000. If your deductible is $1,000, you pay that out-of-pocket before your homeowners insurance provider issuess the remaining $2,000 to fix the damages.

2. A percentage -- In this case, your deductible is a percentage of the total amount of coverage provided by your policy. So, if your home is insured for $200,000 and your deductible is two percent, you'd have to pay the first $4,000 of any claim (two percent of $200,000 = $4,000).

3. A split -- This is a hybrid of the first two. A dollar amount applies to most claims, but a percentage can be triggered by certain events, such as a hurricane or earthquake (see below).

When do deductibles apply?

It's important to recognize that autoand home insurance deductibles are different from those for health plans. Generally, health insurance has an annual deductible, and, once you've reached its threshold, the insurer pays for everything else that year, subject to co-payments and co-insurance.

With auto and home insurance, the deductible applies to each and every claim, regardless of how many you make during a year. So if you live in a place that's particularly prone to recurring risk (from tornadoes, hurricanes, earthquakes, theft and so on) you may have to raid your savings multiple times each year.

However, there's good news if you live in Florida. The law there allows only one deductible each hurricane season for that particular risk.

What about deductibles in areas of special risk?

Speaking of areas that are particularly prone to recurring or special risks, insurers often try to protect themselves against the huge claims that can arise from major disasters. They can do that by imposing or encouraging high deductibles that apply only to those exceptional risks.

Earthquakes

If you live where earthquakes are a regular feature of life, a serious one is a constant threat. Earthquakes are not covered under standard insurance policies. Coverage is obtained with a separate policy, or an endorsement. One part of the policy is for the dwelling and another covers personal property. There is normally a deductible and limit assigned to each portion.

For example, if your house was destroyed in an earthquake and you had $300,000 worth of dwelling coverage with a structure deductible of 20 percent you would pay $60,000. After that amount is deducted, your insurer would pay out the remaining $240,000. If your personal property limit was $50,000 with a 10 percent deductible and you claimed that full amount, $5,000 would be deducted from settlement.

The publicly managed California Earthquake Authority (CEA) offers coverage to residents of California. A standard CEA policy in California includes a 15 percent deductible, but its “Homeowners Choice” policy lets you choose separate coverage for dwellings and personal property with different deductibles.

For other parts of the nation deductibles normally range from five to 20 percent of your replacement cost of the structure covered. However, it’s typical for insurers in high risk areas to insist you have a deductible of at least 10 percent, or they make the premiums required for lower deductibles unaffordable.

According to the Insurance Information Institute (III), that's commonly the case in Nevada, Utah and Washington. But that 10 percent wouldn't apply to all your claims -- only to those arising from an earthquake. That's where split deductibles (see above) come in.

Hurricanes, wind/hail and flooding

The situation is generally similar for hurricane and wind/hail deductibles. Hurricane deductibles apply to damage solely from hurricanes. Windstorm or wind/hail deductibles apply to any kind of wind damage. The III reports that percentage deductibles typically apply to these coverages and run from one to five percent of the home’s insured value. Some states give homeowners the option of paying a higher premium to carry a traditional dollar deductible. This is seldom allowed, though, if you live in a coastal area.

Depending on your state's law and your insurer's protocols, a hurricane deductible may, for instance, only apply once the National Weather Service designates a tropical storm as a hurricane or reports a particular wind-speed threshold. The only ways you can be sure of the factor that triggers your exceptional deductible is to check your policy or talk to your insurer.

The III lists 19 states, plus the District of Columbia, that have hurricane deductibles:

Flooding is a special case, because it's not covered by standard homeowners insurance. You can ask your insurance company whether it offers coverage for this additional risk, or buy coverage from the federal government's National Flood Insurance Program (NFIP). Flood deductibles under NFIP plans range from $1,000 to $10,000.

Saving on homeowners insurance by raising your deductible

From an insurance company's point of view, a deductible is good because it cuts down on the number of minor claims it has to process, and lowers payouts on major ones. Taking on less risk allows insurers to reduce your premiums when you choose a higher deductible amount. A high deductible can knock between 20 percent and 40 percent off your homeowner insurance payments.

Most insurers impose a minimum deductible, but allow you to increase it in exchange for lower premiums. That can be an attractive deal if you're unlikely to make a claim and have sufficient savings to cover your contribution if one day you suffer a serious loss.

When is a deductible likely to save you on your home insurance premiums? The answer to that varies widely by state according to local regulations and by insurer. And your only way to be sure of your potential savings is to shop around for quotes and compare them.

However, the following data give you an idea of what you save by raising your deductible. Here are rates for capital cities in Alabama, California, Colorado, Florida, Kansas, New Hampshire, New York, Ohio, Texas, Virginia and Washington, representing various regions of the country. The coverage level is $300,000 for property and $100,000 for liability.

Annual rate by deductible amount

State and capital

Insurance Company

$500

$1,000

$1,500

$2,000

$2,500

Savings from $500 to $2500 deductible

Sacramento, California

Allstate

$1,169

$997

$997

$825

$825

$344 or 42%

Sacramento, California

Fire Insurance Exchange

$2,210

$2,035

$1,859

$1,618

$1,618

$592 or 37%

Sacramento, California

Liberty Mutual

$1,817

$1,622

$1,622

$1,426

$1,426

$391 or 27%

Sacramento, California

Mercury

$679

$575

$575

$471

$471

$208 or 44%

Sacramento, California

State Farm

$1,150

$1,150

$1,063

$1,024

$976

$174 or 18%

Sacramento, California

Travelers

$858

$771

$728

$618

$618

$240 or 39%

Montgomery, Alabama

Alfa Mutual Insurance

$2,562

$2,246

$2,020

$1,972

$1,972

$590 or 30%

Montgomery, Alabama

Allstate

$3,651

$3,016

$2,991

$2,976

$3,001

$650 or 22%

Montgomery, Alabama

Foremost Insurance

$2,198

$2,108

$2,108

$2,018

$2,018

$180 or 9%

Montgomery, Alabama

Liberty Mutual

$3,538

$3,120

$3,120

$3,076

$3,076

$462 or 15%

Montgomery, Alabama

State Farm

$2,747

$2,747

$2,459

$2,459

$2,281

$466 or 20%

Montgomery, Alabama

Travelers

$1,858

$1,829

$1,807

$1,775

$1,775

$83 or 5%

Montgomery, Alabama

United Service Automobile

$1,314

$1,275

$1,214

$1,214

$1,214

$100 or 8%

Albany, New York

Allstate

$1,509

$1,305

$1,209

$1,209

$1,140

$369 or 32%

Albany, New York

Liberty Mutual

$2,013

$1,685

$1,685

$1,574

$1,574

$439 or 28%

Albany, New York

New York Central Mutual

$769

$670

$637

$597

$597

$172 or 29%

Albany, New York

State Farm

$942

$851

$778

$762

$739

$203 or 27%

Albany, New York

Travco Insurance

$1,148

$1,021

$1,021

$883

$883

$265 or 30%

Denver, Colorado

Allstate

$3,413

$3,132

$2,900

$2,703

$2,408

$1,005 or 42%

Denver, Colorado

American Family

$2,101

$1,892

$1,808

$1,723

$1,682

$419 or 25%

Denver, Colorado

Farmers Insurance

$3,782

$3,455

$2,926

$1,287

$2,575

$1,207 or 47%

Denver, Colorado

Safeco

$1,839

$1,764

$1,712

$1,663

$1,617

$222 or 14%

Denver, Colorado

State Farm

$1,982

$1,982

$1,982

$1,982

$1,982

$0

Denver, Colorado

Travelers

$2,518

$2,353

$2,251

$2,066

$2,066

$452 or 22%

Denver, Colorado

USAA

$2,199

$1,898

$1,419

$1,419

$1,419

$780 or 55%

Topeka, Kansas

Allstate

$2,743

$2,524

$2,348

$2,081

$2,081

$662 or 32%

Topeka, Kansas

American Family

$2,715

$2,382

$2,239

$2,096

$1,954

$761 or 39%

Topeka, Kansas

Farm Bureau

$2,845

$2,180

$2,050

$1,904

$1,769

$1,076 or 61%

Topeka, Kansas

Farmers Insurance

$2,501

$2,292

$2,116

$1,849

$1,737

$764 or 44%

Topeka, Kansas

Safeco

$2,090

$2,017

$1,965

$1,917

$1,873

$217 or 12%

Topeka, Kansas

State Farm

$2,261

$2,261

$2,261

$2,056

$2,056

$205 or 10%

Topeka, Kansas

Travelers

$4,630

$4,366

$3,776

$3,466

$3,466

$1,164 or 34%

Columbus, Ohio

Allstate

$1,011

$954

$878

$849

$838

$173 or 21%

Columbus, Ohio

American Family

$1,345

$1,259

$1,221

$1,183

$1,145

$200 or 17%

Columbus, Ohio

Cincinnati Insurance

$916

$871

$844

$817

$789

$127 or 16%

Columbus, Ohio

Erie Insurance

$1,122

$985

$870

$700

$700

$422 or 60%

Columbus, Ohio

Farmers

$1,067

$982

$877

$791

$791

$276 or 35%

Columbus, Ohio

Liberty Mutual

$1,428

$1,130

$1,130

$1,045

$1,045

$383 or 37%

Columbus, Ohio

Nationwide

$1,349

$1,162

$1,088

$1,006

$1,006

$343 or 34%

Columbus, Ohio

State Farm

$1,857

$1,857

$1,658

$1,658

$1,536

$321 or 21%

Columbus, Ohio

Travelers

$1,258

$1,026

$1,026

$945

$945

$313 or 33%

Richmond, Virginia

Erie Insurance

$2,284

$2,039

$2,019

$1,994

$1,974

$310 or 16%

Richmond, Virginia

Farmers Insurance

$1,201

$1,073

$964

$871

$795

$406 or 51%

Richmond, Virginia

Liberty Insurance

$2,304

$2,112

$2,112

$1,878

$1,878

$426 or 23%

Richmond, Virginia

Nationwide

$1,448

$1,075

$1,075

$962

$962

$486 or 51%

Richmond, Virginia

State Farm

$1,551

$1,392

$1,519

$1,307

$1,307

$244 or 19%

Richmond, Virginia

Travco

$1,449

$1,449

$1,325

$1,302

$1,212

$237 or 20%

Richmond, Virginia

USAA

$1,051

$979

$929

$857

$857

$194 or 23%

Richmond, Virginia

Allstate

$1,010

$968

$889

$889

$889

$121 or 14%

Tallahassee, Florida

Castle Key Insurance

$1,122

$1,051

$1,051

$1,051

$1,051

$71 or 7%

Tallahassee, Florida

Florida Peninsula Insurance

$1,654

$1,512

$1,512

$1,406

$1,406

$248 or 18%

Tallahassee, Florida

State Farm

$2,640

$2,261

$1,882

$1,882

$1,715

$925 or 54%

Tallahassee, Florida

First Floridian

$1,372

$1,325

$1,325

$1,220

$1,220

$152 or 12%

Tallahassee, Florida

United

$1,833

$1,654

$1,654

$1,410

$1,410

$423 or 30%

Tallahassee, Florida

Universal

$2,085

$1,865

$1,865

$1,700

$1,700

$385 or 23%

Tallahassee, Florida

USAA

$2,144

$2,044

$1,965

$1,965

$1,965

$179 or 9%

Austin, Texas

Allstate

$2,563

$2,345

$2,229

$2,229

$2,024

$539 or 27%

Austin, Texas

Safeco

$908

$866

$836

$808

$782

$126 or 16%

Austin, Texas

Texas Farmers

$1,486

$1,453

$1,425

$1,405

$1,091

$395 or 36%

Austin, Texas

Travelers

$1,122

$1,031

$966

$871

$871

$251 or 29%

Austin, Texas

USAA

$1,279

$1,231

$1,149

$1,149

$1,149

$130 or 11%

Concord, New Hampshire

Concord General

$841

$587

$466

$435

$541

$300 or 55%

Concord, New Hampshire

Liberty Mutual

$785

$700

$661

$589

$589

$196 or 33%

Concord, New Hampshire

State Farm

$1,054

$796

$796

$531

$531

$523 or 98%

Concord, New Hampshire

Travelers

$1,833

$1,561

$1,561

$1,357

$1,357

$476 or 35%

Concord, New Hampshire

Vermont Mutual

$1,269

$1,269

$1,150

$1,125

$1,125

$144 or 13%

Concord, New Hampshire

Allstate

$750

$721

$698

$660

$660

$90 or 14%

Concord, New Hampshire

Amica

$816

$679

$679

$644

$644

$172 or 27%

Olympia, Washington

Allstate

$684

$647

$617

$592

$555

$129 or 23%

Olympia, Washington

American Family

$832

$737

$700

$664

$635

$197 or 31%

Olympia, Washington

Farmers

$1,194

$1,133

$1,133

$976

$976

$218 or 22%

Olympia, Washington

Pemco

$788

$674

$638

$569

$569

$219 or 38%

Olympia, Washington

Safeco

$791

$736

$736

$667

$667

$124 or 19%

Olympia, Washington

State Farm

$1,186

$1,186

$1,034

$1,034

$958

$228 or 24%

Olympia, Washington

Travelers

$732

$693

$662

$613

$613

$119 or 19%

Olympia, Washington

USAA

$766

$710

$609

$609

$609

$157 or 26%

Choosing the right homeowners insurance deductible for you

It's easier to make an informed decision about your deductible if you recognize you're looking at a trade-off: Your lower premiums are actually your insurer selling back to you some of the risk inherent in homeownership.

When you're well off or comfortable

It doesn't matter so much to someone who's well off whether they pay higher premiums for low deductibles or lower premiums for high ones, because they can comfortably afford both scenarios. For this category, the choice is a mathematical one, based on the amount they can save through lower premiums against their assessment of the likelihood they'll have to make one or more claims and pay the deductibles. If they get the calculation wrong, the result is irritation rather than devastation.

When you're struggling financially

Things are very different for those who are worse off. Those who have little spare money have the greatest need for lower premiums, but the least ability to meet their obligations to find the cash for a home insurance deductible when a claim arises -- or multiple deductibles if more than one claim arises in a single year.

If you lack a worthwhile emergency fund (and in mid-2016, 66 million Americans had none, according to a CNBC report), you may feel more comfortable having higher deductibles if you first put in place access to borrowing. This could be a home equity line of credit (HELOC), a personal line of credit (which isn't secured on your home) or even a credit card with a significant, unused credit limit. However, borrowing in these circumstances is far from desirable, and should be regarded as a (sometimes) necessary evil.

When you're financially stable, but not well off

If you’re part of the middle class, you need to look at your own finances and determine what deductible is best for you. What can you afford out of pocket? If $1,000 is doable, but $2,500 is a stretch for your savings, then choose the lower deductible so you know you can pay it out if there is a claim. You won’t save as much as if you choose the highest deductible, but you’ll still feel good knowing you are saving some money.

Deductibles and claims

It's sometimes a good idea not to see your deductible as the threshold above which you're going to make a claim. True, the whole point of a low deductible is to protect you from even small losses, but small claims can turn out to be uneconomic.

That's because one of the biggest indicators of risk used by insurers when they calculate your premiums is your record of making claims. Statistically, if you've made claims in the past, you're more likely to do so again.

So, following a claim, your insurance company may well raise your premiums when you come to renew. And that just might see you ultimately paying more than if you hadn't reported the loss in the first place.

It's worth remembering that when you come to decide on the deductible you want. There's no point paying more for a $500 deductible if you're not going to claim for sub-$1,000 losses anyway.

Floaters and endorsements for personal property

Floaters and endorsements are the mirror image of deductibles: Instead of paying less for lower coverage, you pay more for higher.

They are a way of protecting your particularly precious personal possessions that fall outside the scope of standard homeowners insurance policies. For instance, many policies cap payouts on jewelry that's damaged, lost or stolen at $1,500. So if your items are worth considerably more you're going to be out of pocket. You can raise the amount you'd receive for valuables (not just jewelry, but art, antiques and other high-ticket items) in one of two ways:

1. Endorsements -- These increase the total amount you're due for specified types of possessions in the event of a claim.

2. Floaters -- These allow you to list individually each particularly valuable item and its worth in dollars in a process called "scheduling."

Endorsements tend to be cheaper, but floaters are likely to provide a higher level of protection. Depending on the endorsement or floater, your policy deductible or a special deductible may apply.

Shopping around can provide the real savings

Insurance companies can dazzle you with apparently generous savings for deductibles. But, just as with all discounts, those savings may not be as attractive as they first seem.

If the original quote figure was too high then often no amount of 10-percent-off-for-this and 20-percent-off-for-that is going to make it competitive.

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